Bridging the pay gap: Corporate sector needs to redistribute the salary pie

January 28, 2021 6:30 AM

The current budget-related cries are for ‘government to do more to increase demand in a pandemic-affected economy through a fiscal stimulus.

The current budget-related cries are for ‘government to do more to increase demand in a pandemic-affected economy through a fiscal stimulus. While the government will no doubt do what it needs to do, the corporate sector too needs to redistribute the salary pie and provide a stimulus of its own.

By Arvind Mehta & Amit Tandon

This is the season for budget discussions. Among these, will be discussions around the need for the government to ensure greater demand in the economy, to stimulate better GDP growth. While the government’s role in this is germane, it is also important to note that the corporate sector too can play a role in demand enhancement, by resetting the compensation package policies.

If government employment is viewed as the benchmark of “fair” compensation packages for all levels, it would be noted that for public sector enterprises, the differential between median pay and that of the CEO would be between 5-8 times. As against this, the average relative benchmark for listed private sector entities has been showing a rising trend inching towards 100-times (with the upper range at an obscene 4,045-times), and the Indian CEO’s salary to average worker pay at 229-times. This is higher than all other countries barring the US—not a data-point India can be happy about.

The inference from the above numbers is that the ‘elites’ are taking advantage of the relaxation of the rules by paying themselves higher and higher salaries. Since the propensity to spend of these few, can never match the aggregate propensity to spend of the many—a policy corrective may be required to manage these inequities also from the viewpoint of generating demand and consequently GDP growth.

Many economists have highlighted how modern-day societies have turned more iniquitous due to the top 1% garnering a greater share of the incremental GDP and wealth distribution. In particular, what is worrying is how the bottom 50%, ie, those sitting at ‘the bottom of the pyramid’ are able to collect only the crumbs of growth, progressively losing their relative share. The ‘trickle-down’ theory of economic growth is now metamorphosing into murmurs of ‘trickle-up’ for the 1%.

Governments certainly need to consider all possible policies to address demand generation issues arising from the pandemic induced crisis. In this context, the current compensation trends in the private sector companies risk attracting the attention of policymakers. The government has continuously ceded the market-related roles to a vibrant and growing private sector since the 1990s. It is time for the private sector to step out to bat by addressing the growing untenable iniquitous compensation packages.

A recent social media video that went viral had an American Congresswoman’s inquisition of the CEO of one of the largest investment banks in the world with regards to its compensation policies (bit.ly/3iXL57K). The CEO was at pains to explain how a particular employee had been receiving a ‘market-related’ compensation package. The Congresswoman was emphasising how this market-related compensation package did not cover even basic minimum living expenses. She then went for the CEOs jugular by making him own up to his own ‘market-linked’ obscenely high compensation package.

In contrast, Unilever is reported to have made a public announcement very recently that its company policy would be to ensure that all employees, including contractual employees linked to their supply chains, are able to at least earn wages/salaries that meet the minimum standards of a decent living in modern-day society.

Karl Marx based his economic philosophy on the tenet that the capitalist class appropriating as much of labour’s surplus as possible while leaving the labour class with a barely sufficient minimum living wage was inherently unstable. His theories provided the ammunition to Lenin and others to speed up revolutions against society’s exploiting class. To counter such further spread of revolutions, democracies all over the world moved towards a greater role of governments in the welfare of the less privileged.

And if Marx’s views are too progressive for India Inc, then Narayana Murthy should be heard. He, after all, has created more wealth than others for his employees and shareholders. He argued that managerial remuneration has to be a fair multiple of the compensation of the lowest level employee in the company. His proposition is that if the lowest paid employee’s remuneration is Rs 2-3 lakh a year, the CEO’s remuneration should be Rs 70-80 lakhs.

Corporate India can address this issue in two ways. It can increase workers’ salaries in proportion, an expensive ask given the elevated salary levels in the corner room, or rationalise the salary for those at the top.

As our society starts exhibiting tendencies towards the greater and greater inequitable distribution of wealth creation, it is important for CEOs and boards to voluntarily correct the skewed salary distribution. It will be beneficial if CEOs and corporate boards start this shift on a voluntary basis, rather than wait for a growing clamour in the government to go back to license raj days of fixing ceilings on corporate pay packages. Put bluntly, if corporate India wants the government to exhibit a laissez-faire approach on compensation, its current process needs to be re-calibrated.

The current budget-related cries are for ‘government to do more to increase demand in a pandemic-affected economy through a fiscal stimulus. While the government will no doubt do what it needs to do, the corporate sector too needs to redistribute the salary pie and provide a stimulus of its own.

Mehta is former IAS officer, retired as secretary to the 15th Finance Commission. Tandon is MD, Institutional Investor Advisory Services. Views are personal

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